SECTION-BY-SECTION OUTLINE OF JULY 1, 1958 REVISION OF PROPOSED HOME MORTGAGE GUARANTY CORPORATION ACT

The bill creates Home Mortgage Guaranty Corporation to enable members of the Federal Home Loan Bank System to supply broadened support to low downpayment home mortgage loans in their communities.

Section 601: Enacting clause. Act may be cited as "Home Mortgage Guaranty Corporation."

Section 602: The Home Mortgage Guaranty Corporation chartered as a corporation for stated purposes.

Section 603: The Federal Home Loan Bank Board is authorized and directed to operate "Corporation” and to prescribe bylaws, rules, and regulations.

Section 604: (a) Board shall provide for issuance of $100 par nonvoting capital stock of the Corporation, and may require members of the Federal Home Loan Bank System to buy and hold such stock, up to 1 percent of original principal balance of loans submitted by such member for guaranty.

(b) Within 60 days from enactment Federal home loan banks shall prescribe pro rata to $20 milion par value of stock on call of Board.

(c) When financial condition of Corporation warrants the Board may pay dividends or retire stock on a seniority basis. Board may regulate and restrict transferability of stock.

Section 605: Vests ordinary corporate powers in Corporation as an instrumentality of the United States, including right to acquire and deal with foreclosed property. Authorizes Board to control appointment and compensation of personnel without regard to other laws; to lend personnel, services and facilities to the Corporation on a reimbursable basis. Permits Corporation to use help of other governmental agencies with consent of such agencies, and to incur and pay its own necessary expenses without regard to the provisions of any other law. Section 606: Corporation may borrow money, issue obligations, and invest in obligations of or guaranteed by United States. May be depository of public money or fiscal agent of United States.

Section 607: Exempts Corporation, its assets, and activities from Federal and State taxation, excepting estate, inheritance and gift taxes, and real property taxes provided obligations issued by Corporation shall be subject to Federal income tax provisions.

Section 608 Regulates advertisements and prohibits representations that mortgages are in any way guaranteed by the United States.

Section 609: (a) Requires Board to regulate

(1) eligibility of loans-but no loan may exceed $25,000-and must be secured by first lien on single family dwelling within regular lending area of mortgage, owned by mortgagor, and occupied by him as his home or in good faith intended for such occupancy;

(2) valuation and loan terms-no loan may exceed 90 percent of appraised value, and must be amortized on a regular monthly basis within 25 years;

(3) obligation of the Corporation as guarantor-limited guaranty to 90 percent of 20 percent of loan balance, expiring when debt is paid down below 50 percent of original appraised value;

(4) premium-not less than 1 percent of original principal amount of loan, payable in advance;

(5) method of payment-either in cash or debentures;

(6) methods of and items to be included in any required settlement on a guaranty; and

(7) appraisal practices.

(b) Limits rights under guaranties and other obligations of Corporation to the assets of the Corporation. Provides no guaranty or obligation shall be a liability of the United States.

(c) Prohibits retroactive change in the rights of a holder of a guaranteed loan. Permits transfer of guaranteed loan, as approved by Corporation.

Section 610: Authorizes Board:

(a) to suspend or take other summary disciplinary action against any participant. Postpones right of affected parties to obtain hearing or judicial review until after action taken and hearing conducted pursuant to Administrative Procedure Act.

(b) (1) to limit volume of any participant;

(2) to limit secondary financing;

(3) to prescribe maximum contract rate of interest;

(4) to admit as participants mortgagees which are not members of a Federal home loan bank; and

(5) to impose other requirements, limits, or conditions.

Section 611: Empowers Board to require reports and examinations of participants.

Section 612: Separability clause.

Section 613: Territorial applicability of act.

REVISED DRAFT OF PROPOSED LAW AUTHORIZING THE MORTGAGE GUARANTY CORPORATION BASED ON PATTERN ADOPTED BY SENATE SUBCOMMITTEE ON BANKING AND CURRENCY (WHICH APPEARED AS TITLE VI OF HOUSING ACT OF 1958)

SEC. 601. This title may be cited as the "Home Mortgage Guaranty Corporation Act."

SEC. 602. The Home Mortgage Guaranty Corporation (hereinafter referred to as the “Corporation") is hereby created and chartered as a corporation for the purposes herein stated.

SEC. 603. The Federal Home Loan Bank Board (hereinafter referred to as the "Board") is authorized and directed to operate such Corporation and to prescribe bylaws, rules, and regulations not inconsistent with this Act.

SEC. 604. (a) The Board shall provide for the issuance of nonvoting capital stock of the Corporation, divided into shares of $100 par value each. The Board may, by regulation, require participating members of the Federal Home Loan Bank System to purchase at par value and hold stock of the Corporation as a condition precedent to the right of any such member to obtain guaranties under this Act, except that no such regulation may require any such member to purchase such stock having a par value in excess of 1 per centum of the original principal balance of loans submitted by such member to the Corporation for isuance of its certificate of guaranty after the date of such regulation. Subject to regulation of the Board, any Federal savings and loan association is authorized to purchase and hold capital stock of the Corporation.

(b) Within 60 days after the date this Act becomes law, upon the call of the Board, the Federal home loan banks shall subscribe to such stock having a par value approximating $20,000,000, and shall purchase and pay for the same in proportion to the par value of the outstanding capital stock of each Federal home loan bank at the time of such call.

(c) Whenever in the opinion of the Board the financial condition of the Corporation warrants such action, dividends may be paid on the capital stock of the Corporation, or a part of the outstanding stock of the Corporation, may be retired: Provided, That any such retirement shall be in order of the seniority of such stock as to date of issuance. The Board shall also provide by regulation for the transfer or assignability of capital stock or for restrictions on the right of any participant to transfer or assign capital stock.

SEC. 605. Upon the date of enactment of this Act, the Corporation shall become a body corporate, and shall be an instrumentality of the United States and as such have power

(a) to adopt and use a corporate seal;

(b) to have succession until dissolved by Act of Congress;

(c) to make contracts and to guarantee loans, subject to the limitations prescribed in this Act;

(d) to sue and be sued, complain and defend, in any court of law or equity, State or Federal;

(e) to bid in at foreclosure sale or otherwise purchase, acquire, hold, manage, lease, recondition or resell any real property given as security for a loan it has guaranteed; and

(f) to appoint and to fix the compensation of such officers, employees, attorneys, or agents as shall be necessary for the performance of its duties under this Act, without regard to the provisions of any other law relating to the employment or compensation of officers or employees of the United States. Nothing in this Act or any other provision of law shall be construed to prevent the appointment and compensation, as an officer,

attorney, or employee of the Corporation, of any officer, attorney, or employee of any board, corporation, commission, establishment, executive department, or instrumentality of the Government, including the Federal home loan banks. The Corporation, with the consent of any such board, corporation, commission, establishment, executive department, or instrumentality, including any field services thereof, may avail itself of the use of information, services, and facilities thereof in carrying out the provisions of this Act, and may pay reasonable compensation therefor, and all of the foregoing are hereby authorized to provide to the Corporation such information, services, and facilities as it may request. The Corporation shall be entitled to the use of the United States mails for its official business in the same manner as the executive departments of the Government, and shall determine its necessary expenditures under this Act, and the manner in which the same shall be incurred, allowed, and paid, without regard to the provisions of any other law.

SEC. 606. For the purposes of this Act, the Corporation shall have power to borrow money, and to issue notes, bonds, debentures, or other such obligations upon such terms and conditions as the Board may determine. Moneys of the Corporation may be deposited in any Federal home loan bank, or any commercial bank the deposits of which are insured by the Federal Deposit Insurance Corporation, or invested in obligations of, or obligations which are guaranteed as to principal and interest by, the United States. When designated for that purpose by the Secretary of the Treasury, the Corporation shall be a depository of public money, under such regulations as may be prescribed by the Secretary of the Treasury, and may also be employed as fiscal agent of the United States, and it shall perform all such reasonable duties as depository of public money and fiscal agent as may be required of it.

SEC. 607. All notes, bonds, debentures, or other such obligations issued by the Corporation shall be exempt, both as to principal and interest, from all taxation (except estate, inheritance, and gift taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority. The Corporation, including its franchise, activities, capital, reserves, surplus, and income, shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority: except that any real property of the Corporation shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed. Nothing in this section shall affect the applicability of section 4 of the Public Debt Act of 1941, as amended (31 U. S. C. 742a).

SEC. 608. No individual, association, partnership, or corporation shall advertise or otherwise represent, by any device whatsoever, that his or its mortgages are insured or in any way guaranteed by the Home Mortgage Guaranty Corporation, contrary to regulations of the Board prohibiting, or limiting or restricting, such advertisement or representation. No individual, association, partnership, or corporation shall advertise or represent, by any device whatsoever, that his or its mortgages which are guaranteed by the Home Mortgage Guaranty Corporation are insured or in any way guaranteed by the Government of the United States.

SFC. 609. (a) The Board shall issue regulations to carry out the provisions of this Act dealing with, but not limited to the following:

(1) The eligibility of loans for guaranty: Provided, That no loan shall be eligible for guaranty unless the original principal amount thereof does not exceed $25,000, it is secured by a first lien on real property on which there is situated a dwelling designed for single-family occupancy located within the regular lending area of the mortgagee, and such dwelling is owned by the mortgagor and occupied by him as his home or intended in good faith for such occupancy:

(2) The maximum ratio of loan to appraised value and the maximum amortized term for loans guaranteed under this Act; except that in no case shall any such loan exceed 90 per centum of the original appraised value of the security therefor, or be amortized on other than a regular monthly basis or over a period in excess of twenty-five years from the date of the loan;

(3) The obligation of the Corporation with respect to any loan guaranteed under this Act: Provided, That no guaranty under this Act shall extend to any mortgage loan the principal amount of which has been re

duced by payments of the mortgagor to less than 50 per centum of the original appraised value of the security therefor and no such guaranty with respect to any such loan shall be for more than 90 per centum of an amount equal to 20 per centum of the balance owing from time to time on the obligation covered by a certificate of guaranty.

(4) The premium to be charged for the guaranty of any loan: Provided, That any such premium shall be payable in advance and shall not be less than 1 per centum of the original principal amount of the mortgage loan; (5) The method of payment of any guaranty, either in cash or in debentures of the Corporation;

(6) The methods of, and items to be included in, any settlement required as the result of the guaranty of any loan under this Act; and

(7) The valuation of property securing loans to be guaranteed hereunder, which regulations and their subsequent supervision by the Board shall seek to assure the initiation and observance of appraisal practices designed to safeguard the assets of the Corporation against any excessive margin of risk. (b) The payment or satisfaction of any guaranty or rights arising therefrom, or of any other obligation of the Corporation, shall be limited to the assets of the Corporation and no such guaranty or obligation shall constitute a liability of the United States.

(c) The rights of a holder of a guaranteed mortgage and the establishment of the amount of a final loss on a guaranty shall be governed by those regulations in effect at the time when the mortgage is reported for guaranty. A guaranty shall be for the benefit of the original holder of the guaranteed mortgage and of any subsequent holder which is a member of a Federal home loan bank or an individual, association, partnership, or corporation approved for the purposes of this sentence by the Corporation, by regulations or otherwise.

SEC. 610. (a) The Board may at any time, in its sole discretion, and without any requirement of notice or other proceedings, refuse either temporarily or permanently to guarantee loans made or held by any specified lender or holder, or bar either temporarily or permanently any individual, association, partnership, or corporation from acquiring loans guaranteed under this title, or terminate, upon terms and conditions or otherwise, any such refusal or bar. action by the Board under this section shall be final and conclusive and shall not be subject to judicial or other review except after a hearing conducted subsequent to such action under the provisions of the Administrative Procedure Act.

(b) The Board is further authorized:

Any

(1) To restrict from time to time the percentage of the total loans made in any calendar year or the total percentage of its loan portfolio, which any institution or mortgagee may have guaranteed as provided in this Act.

(2) To limit or prohibit secondary financing incident to any purchase of property financed in part by a guaranteed loan.

(3) To prescribe from time to time such maximum contract rate of interest as it may deem reasonable taking into consideration the current demands of the mortgage market.

(4) To provide for the guaranty of loans made by institutions or corporations which are not members of a Federal Home Loan Bank and which are engaged in the home mortgage business, and to prescribe in relation to the participation of such institutions or corporations appropriate regulations concerning their qualification, examination, supervision, and purchase of capital stock; or

(5) To make and impose such other requirements, limits, or conditions not inconsistent with this Act as may reasonably be necessary to the proper operation of the Corporation.

SEC. 611. The Corporation is authorized to require any member of a Federal home loan bank which has obtained a guaranty under this Act to make reports, to supply copies of reports of public examinations and of public and private audits, and to make its books and records available to the Corporation and to permit the Corporation to examine them. It may make such examinations as may reasonably be necessary and the institution examined shall pay the cost of such examination.

SEC. 612. If any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons or circumstances, shall not be affected thereby. SEC. 613. Notwithstanding any other provision of law now or hereafter in

force, the provisions of this title shall apply to the several States, the District of Columbia, and the Territories, dependencies, and possessions of the United States. The term "State" as used in this title includes Puerto Rico.

HOME MORTGAGE GUARANTY CORPORATION (July 9, 1958)

RELATION OF RISK TO ASSETS

To estimate in advance the prospective adequacy of the assets, resources, or reserves it will take to embark on any new venture requires reliance upon the parallel or comparable experience of similar activities. Reasonable assumptions must be made in the way of forecasting, and sensible recasting of statistical data must be relied upon to make it applicable to the prospective pattern of the new activity.

Into the buildup of the outstanding over $100 billion in home mortgage debt there must have been woven a wealth of usable data and experience that can be drawn on to foretell reasonably theh probabilities that should face the proposed operation of the Home Mortgage Guaranty Corporation.

Such an approach has been depicted in some detail on the pages which follow, and the conclusions that have emerged are encouraging. They may be briefed as follows:

SUMMARY OF OPERATIONS

Period of operation: 3 years and 3 months ending December 31, 1961. Number of loans guaranteed: 450,000.

Amount of loans guaranteed: $5,220 million.

Number of claims submitted: 2,400.

Amount of claims submitted: $5,010,400.

Operating expenses paid: $2,175,000.

Remaining risk outstanding: $798 million.

Liquid assets available: $121 million.
Ratio of assets to risk: 15 percent.

Analysis of comparable experience

In probing parallel experience to aid in an estimate of the capital and income necessary to supply adequate financial worth to the obligations to be undertaken by the proposed Corporation it becomes apparent that the experience of individual associations must be rejected as a comparable. Each has had always a much lower pattern of loan-to-value ratios than the new plan would make eligible for its guaranties. Secondly, each has undertaken a risk determinable within a confined area of operation, dependent largely upon local economic factors, whereas the risk to be undertaken by the Corporation assumes broad participation on a national basis, and thus will embrace a spread and averaging of risk that is an essential embodiment of any properly conceived share-therisk plan.

Such considerations lead inevitably to the conclusion that the only two comparable even though not parallel programs which can be used for the purpose of probing the prospective risk of the Corporation are the FHA section 203 insurance program, and the VA home-loan guaranty program.

But in using various facets of the experience of each of these Governmentbacked programs, it should be borne in mind that the risk assumed by the respective agency in each cast is virtually 100 percent-far greater than that which the Corporation would assume. It is greater in a twofold aspect (1) a 100 percent insurance commitment, or a 60 percent guaranty stands in the stead of the narrower 20 percent less 10 percent coinsurance coverage proposed to be assumed by the Guaranty Corporation; (2) it is based upon an extremely high ratio of loan-to-value, which in the case of VA includes a high percentage of no downpayment, and even “no-no-down” cases, against which the Corporation contemplates a minimum of 10 percent cash down by the borrower But the reassuring element of Government supervision would be part of the package, and the national pattern of risk would be similar except that it is expected the Guaranty Corporation record will reflect a higher share of volume in nonmetropolitant areas than is true of FHA, and even of VA.

Secondly, in practice a high percentage of advance commitments have long been featured in the FHA program-a type of activity that is fraught with the highest margin of risk prevalent in home-loan mortgage lending; one which often